Gonzalez Sees Conversion Proceeds Possibly Helping to Fund Bailout

By Meredith, Robyn | American Banker, February 8, 1994 | Go to article overview

Gonzalez Sees Conversion Proceeds Possibly Helping to Fund Bailout


Meredith, Robyn, American Banker


WASHINGTON - Raising the stakes in the debate on mutual thrifts that convert to stock ownership, the chairman of the House Banking Committee is asking whether some proceeds from the deals should be used to pay for the S&L bailout.

Rep. Henry B. Gonzalez, D-Tex., announced Friday that he had asked Congressional Budget Office director Robert D. Reischauer to study the question of who should get the proceeds that mutual thrifts have built up over the decades when they change to stock form.

"Why should management and insiders be the only ones to prosper from a mutual-to-stock conversion?" Rep. Gonzalez said in a statement. "Couldn't the profits from these transactions be applied toward other expenditures to offset government funding for the Resolution Trust Corp., decrease the obligations of [the Savings Association Insurance Fund] toward the cost of savings and loan resolutions, or be paid into the federal deposit insurance funds?"

Whose Net Worth?

Reid Nagle, president of SNL Securities, a Charlottesville, Va.-based bank research and publishing firm, said, "The appropriate approach to take is to philosophically address who the existing equity in mutual institutions belongs to," Mr. Nagle said. "I am inclined to think it should be given to charity."

"It is like when someone finds in a bus terminal a suitcase full of cash - who does it really belong to?" Mr. Nagle asked.

Legislation has been introduced in both the House and Senate that would restrict the amount of new stock insiders could claim in stock convertions, particularly those under state laws. Critics say insiders have profited in the deals at the expense of depositors, who technically own the institutions.

Technical Ownership

Washington lawyers who craft conversion deals point out that past court cases have equated depositors' ownership firghts with those of a company's creditors. "It is a romantic concept that really isn't applicable in the modern banking world," said Raymond J. …

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